Can’t stand the heat? Don’t open a restaurant.

Restaurant operators continue to open new eateries, but they’re facing a tougher road ahead in a fiercely competitive industry.

The same number of restaurants have opened so far this year in the City of Richmond as at this time last year. But more are going out of business according to Joe Gusti, an owner of an equipment store that bears his name. Gusti’s is a major supplier for central Virginia restaurants.

Lately, Gusti says he is getting three times as many calls from failed restaurants in Virginia seeking to sell-off their equipment.

Since January, 51 new business licenses for restaurants have been issued in the City. That is almost the same as 2007 and 2006. (BizSense was unable to get the figures from Chesterfield – there was a $125 fee – or Henrico. The City of Richmond was also unable to provide sales receipt data on deadline.) But a dip in meals served will lead to a dip in meals tax revenue, which helps fund the Richmond Convention Center and Visitor’s Bureau.

Sales of new equipment at Gusti’s have fallen by about 25% compared to last year. But Gusti says sales of used equipment are rising.

“When an existing restaurant’s equipment breaks down, instead of replacing it they repair it,” said Gusti. “I think the main thing that is going to help me out on my end is used restaurant equipment.”

Gusti said that whenever the economy takes a downturn a lot of people enter the business thinking it is an easy way out, often using their severance or retirement to get started.

“It’s really sad because they think they make one good meal at home that the neighbors love, they think that is going to carry the restaurant,” said Gusti. “They don’t realize they got to be a dishwasher or a plumber or an electrician. It’s a 24-7 job.”

Nationwide, growth in the restaurant sector is softening. The National Restaurant Association’s monthly composite index that tracks the health of the industry (Restaurant Performance Index) averaged 98.5 for the first half of 2008. August marked the tenth straight month the index fell below 100, representing a prolonged period of contraction.

“Depending on how consumer spending proceeds in the fourth quarter, it could be the most challenging environment since the 1980’s,” Hudson Riehle, the group’s chief economist, told Reuters.

Riehle said that consumers are still spending half of their food dollars at restaurants, but it appears more people are going to lower-cost restaurants.

Opening a restaurant can cost several hundred thousand dollars, and an entrepreneur can quickly fall behind on a debt payment. Several local restaurateurs are on hold because their backers are unwilling to release financing in the current economy, according to a source that help restaurants find real estate.

Established restaurants owners can also get burned when they try to raise prices to cover the increasing costs of ingredients like flour and dairy.

Alan delForn, who  is part-owner of Star-Lite Dining & Lounge and Bandito’s Burrito Lounge, says he expects to see more restaurants close, especially more expensive eateries, as the year comes to a close.

“Food costs are going up, everything we purchase goes up. In the restaurant business you just can’t pass it on to the customer,” delForn said. “Restaurants as a whole are going to have a lower net profit or make no profit at all.”

But that isn’t stopping delForn from hedging his bets; he is considering plans to launch one or two more restaurants in the near future. For him, he is counting on two key concepts to make his next ventures successful.

“People of all ages are more concerned about the quality of what they are eating and are more health conscious, so a more healthy menu with more taste and flavor,” delForn said.

The other concept is to set up shop in an under-serviced area.

“If people can get the same thing closer to home, they are going to do that,” delForn said.

That could mean trouble for more upscale dining establishments, but that isn’t stopping them from opening. Stronghill Dining Company in Scott’s Edition and River’s Ridge in the West End are the two latest fine-dining eateries to open.

Acacia Midtown is preparing to open in The Fan sometime in the next couple of weeks. The original Acacia in Carytown closed last year after the landlord announced he was raising the rent.

Said Acacia owner Dale Reitzer: “They tried to increase the rent by almost doubling, and, the amount of money we would have to reinvest into that business, it didn’t make much sense for us to stay open.” He expects that the change in location will be a benefit to the business.

“The new location is a lot more visually attracting. We are trying to be more approachable and not so much a destination restaurant,” Reitzer said.

But several upscale restaurants have closed soon after opening. Cirrus on East Main Street, and Infuzion, a fancy nightclub with a much publicized ice bar in Scott’s Addition, closed after barely being open six months.

Established restaurants are generally in a stronger position to weather a downturn. Ted Doll, owner of Zeus Gallery Café in the city’s Museum District, says his restaurant is prepared to make it through the toughening economy.

“With the climate that is going on now, I have to keep my product current, and people aren’t going to all of sudden become gourmet cooks at home, so I have to keep putting my gourmet products out there at an accessible price,” said Doll.

Most entrees usually are close to a $25 dollar price point, but Doll expects to offer more dishes that are closer to $20.

“It’s not like I’m really lowering prices. If anything I am creating new dishes that are both gourmet and made with quality ingredients, that are tasty and delivering value,” said Doll.

Doll says he is averaging the same number of customers, but he says some customers are adjusting their ordering habits.

“A few people are splitting dishes, which is fine,” Doll said, “but they still are getting individual appetizers and desserts.”

More reading:
High-end restaurants on a tightrope of economic uncertainty

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